Celestica’s improving margins highlight its Q2 results, says Paradigm

Paradigm analyst Gabriel Leung says improved margins in Celestica’s (TSX:CLS) second quarter overshadow its weaker Q3 guidance.

Yesterday, Celestica reported its Q2, 2014 results. The company earned (US) $40.9-million on revenue of $1.47-billion, a topline that was down 2% from last year’s Q2.

CEO Craig Muhlhauser took a longer view of the company’s results.

“Celestica delivered a solid second quarter with revenue and adjusted earnings per share at the higher end of our guidance, driven primarily by demand strength from our communications end market. As a result of our revenue growth, strong operational performance and focus on continuous improvement, we achieved sequential improvements in operating margin, inventory turnover and free cash flow generation,” he said. “As we look to the future, we remain confident in our strategy and ability to further accelerate our progress by leveraging our strong foundation of innovation and operational excellence through continued investments in people, capabilities and technologies that will enable our customers’ success.

Leung says he was very pleased with Celestica’s margin improvement in the second quarter. He notes that the company’s current operating margin of 3.5% is up from 3.1% last quarter and 2.9% last year, and is currently at a two-and-a-half year high. He attributes these improvements to operational efficiencies and an improved revenue mix.

The Paradigm analyst says the company’s updated guidance for Q3 of $0.21–$0.27 in earnings on revenue of between $1.4 and $1.5-billion falls below his expectations of $0.27 on revenue of $1.57-billion, and also below the street consensus of $0.25 in earnings on $1.49-billion.

As a result of this mixed news, Leung is maintaining his “Buy” rating and $13.50 one-year target on Celestica, implying a 21% return at the time of publication. He says his target is based 7x his expectation of the company’s fiscal 2015 EV/EBITDA.